Kenya risks debt distress over high interest rates: IMF

Kenya uses nearly half of its tax collection to service interest on loans, the International Monetary Fund (IMF) has said in a review

Kenya uses nearly half of its tax collection to service interest on loans, the International Monetary Fund (IMF) has said in a review, warning that the situation is synonymous with countries at risk of debt distress.

“General government debt has risen to 57 percent of GDP, which is the highest in the EAC (East African Community) region, except for Burundi. This has led the debt servicing to revenue ratio to more than double since 2011 and the ratio is projected to reach 40 percent in 2019, a level typically only associated with countries at high risk of debt distress,” the IMF said.

Official data shows that Kenya needs to pay Sh441 billion in loan interest this year — an amount that will rise to Sh475.9 billion next year, before rising to a high of Sh483 billion by 2022. This will be paid through collected revenue. The country will spend another Sh255 billion to repay principal loans this year, and this will rise to Sh320 billion next year and Sh378 billion in 2022.

The Treasury has been undertaking reforms that include a new debt policy that is seeking to raise transparency in debt auction, cancel loans on stalled projects, vet all loan deals and limit commercial loans to profitable projects. Social projects will only be funded by concessional loans. Although the country is committing to cut spending to rein in debt, expensive loans that have already been acquired are taking up more of taxes, leaving no options for the government but to borrow more money.

Stanbic Bank Regional Economist for East Africa Jibran Qureishi said the huge external debt service could impact the amount of dollars that Kenya holds, with the risk of weakening the shilling and causing volatility in the Balance of Payment. “Last year’s repayment was higher than this year but if you look at 2020 going forward, debt service grows progressively in the next few years,” he said.

According to him, however, the National Treasury has taken the right step by committing to seek concessional loans from multilateral, bilateral and development finance institutions, though a Eurobond could still offer better prospects if it is long-term and cheap.

“If you build a road or a bridge on a three-year loan that is amortizing, there is no way they will generate a return on investment to justify the spending. But if you borrow a 30-year loan with a 10-year grace period and interest rates less than two percent then we can argue that the infrastructure has a better chance, not guaranteed of delivering a return on investment or breaking even,” Mr Qureishi said.

Removal of the interest rate cap means government will have to pay more interest on the local debt, especially since banks have the options to lend to the private sector. The World Bank warned that 43 percent of the Sh2.87 trillion public debt owed to local investors will mature in September this year, increasing the pressure and cost to refinance.

Kenya changed the law last year, which had prescribed the country should borrow only half of its gross domestic product to a limit that now allows the Treasury to borrow upto Sh9 trillion — or almost 100 per cent of the current GDP.

Source: Business Daily Africa